BHP rethinks shale gas spending

Depressed US natural gas prices have forced
BHP Billiton
to adjust spending on North American shale gas less than a year after the acquisition of the assets for a combined $US20 billion.

Chief executive
Marius Kloppers
said on Wednesday that the company would prioritise the development of liquids-rich regions rather than regions that hold “dry" gas that don’t contain valuable liquids to boost revenue flows.

BHP has previously said it would spend about $US20 billion in capital expenditure on its shale gas business over the next five years. Mr Kloppers wouldn’t give a revised figure on Wednesday, but said that spending would be weighted less towards gas and more towards liquids.

Petroleum boss
Mike Yeager
“will continue to do his baseline spend" in the gassy part of the onshore business, Mr Kloppers said, but will probably increase spending on the Eagle Ford liquids region and the earlier stage Permian Basin region.

Despite some concerns expressed by analysts, the company didn’t write down the value of the acquisitions in its interim results and Mr Kloppers suggested on a conference call that such a move might not be necessary because of higher crude oil prices and the growing emphasis on liquids production.

The news came after BHP reported a bigger than expected 38 per cent jump in underlying earnings before interest and tax in the first half for petroleum to $US3.94 billion, the biggest gain of any of BHP’s businesses apart from energy coal.

But while the numbers beat most analysts’ expectations, the figures were inflated by some one-time gains, including $US222 million on gas derivatives and $US119 million on derivatives on sales contracts at the Angostura project in Trinidad.

US natural gas prices have almost halved to $US2.50 per million British thermal units (MMBtu) down from $US4.90 when BHP purchased Petrohawk Energy for $US15.1 billion in July last year. The miner also splashed $US4.75 billion on the Fayetteville shale assets owned by Chesapeake Energy, the second largest gas producer in the US.

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“Conditions are much, much tougher than BHP would have expected so soon after making that acquisition," James Bruce, global head of resources at Perpetual, said on Tuesday, before the results were released. “I think BHP paid a price that they thought was value to them but I think it was well and truly above what the market expected them to pay and now you’re getting those questions emerging over the business."

Several analysts including RBS Equities said at current prices, BHP’s US onshore gas business is loss-making with Credit Suisse forecasting a potential impairment charge in the company’s full-year results in August.

“While we are unable to quantify the size of a potential impairment at this stage, the value of the writedown would be the portion of the reserves that would be uneconomic assuming persistent lower prices and current costs," Credit Suisse analyst Paul McTaggart said on Tuesday before the interim results on Wednesday.

Some shale gas producers, including Chesapeake Energy, have cut back drilling to limit their exposure to lower prices. However, UBS expects BHP to follow the lead of US energy major ExxonMobil Corporation by maintaining supply and emphasising its drilling activity on fields containing more liquids in the Eagle Ford shale.

Tri-Zen International gas consultant Tony Regan agreed there was a growing sense that major companies like BHP may have overpaid to gain entry into the US shale sector.

“It doesn’t look very attractive on current pricing you would have to say," said Mr Regan. “People started investing some years ago and it became a flood in recent times but you’re now at that point in the cycle where there are valid questions about what sort of profitability this is going to deliver to shareholders."

Mr Kloppers said the forward curve for US gas prices had softened by about $US1 since BHP made the acquisitions. But the percentage of liquids that BHP will produce from its onshore petroleum assets will probably increase beyond the 20 per cent previously targeted by 2015, he added.

“The total value proposition of the acquisition is unchanged," Mr Kloppers said. “This is a revolutionary energy source. It is going to change things around the world, not only in the US."

He said that while some producers would likely make “terrible returns" on shale gas, the quality of BHP’s shale resource, its ability to operate at scale, its lower cost of capital and its strong balance sheet meant BHP was well placed in the sector.

Mr Kloppers also pointed to the rapid growth in consumption of gas in the US, where low prices are spurring additional demand for gas from power generators and petrochemical manufacturers, and for growing opportunities to export gas as liquefied natural gas.

“If one takes a long-term view, it was probably a smart move to be an early investor in what is going to be a huge and significant market as demand for gas grows and there is increasing environmental pressure to switch from coal and oil to ‘clean’ gas," Tri-Zen’s Mr Regan said.